For example, if your stop level for corn (where we are short) came in at $400 exactly, you would reduce it to $399.99 or slightly lower. If the stop for Euro Stoxx 50 (a long position) was 3,200, then you would increase it slightly to 3,200.01 or even a li ttle higher.
The opening stop loss calculations for the chapter examples are shown in table 18. Notice that the stop loss level is above the initial price for my short positions, and below the initial price for the longs in Euro Stoxx 50 and S&P 500.
Table 18: Initial stop losses for example instruments Instrument risk (A) from table 16. Prices (B) fr om table 15.
Trade
Now it is time to act ually trade.
Some advice on how to place orders and reduce trading costs is given in appendix B. Table 19 shows the trade log for the initial trades. You should keep your own log, either on paper or in a spreadsheet. I will update this log after each subse quent trade.
Table 19: Trade log after initial trading Table includes commissions, but not spread costs, since the price shown reflects the effect of paying the spread. No commissions are payable for spread bets, CFD, and spot FX.
Tasks on subsequent days
Because the Starter System trades quite slowly, it is suitable 20 20
for daily trading. 78 75 Daily trading is ideal for traders who have other things to do besides trade. It also means that you can use daily closing prices, which can be obtained for free, rather than expensive intraday data. In this section, I discuss the daily tasks required when running the Sta rter System.
Get, and record, the value of your account 20 20
You need to snapshot the current value of your account 78 76 to size positions on any new trades. It’s also useful to record your daily profits and losses so that you can evaluate your trading p 20 20
erformance. 78 77
Get an updated price series and measure instrument risk Follow the process discussed earlier in this chapter (pages 124
and 129 re spectively).
Monitor stop loss gaps
This also needs to be done daily.
Firstly, work out when the most profitable price point of your existing trade was – the high watermark . If long, take the highest daily closing price achieved since you entered the trade.
With a short position use the lowest closing price. For dated products high and low watermarks should ideally be calculated using the back-adjusted price, as this can be directly compared to the price of the current dated instrument that you are trading.
If you are long your stop loss price will be equal to the high watermark price point minus the stop loss gap. With a short position your stop loss is the high watermark price plus the stop loss gap (see formula 24).
Traders using stop loss orders left with their broker, and whose stop level has changed, will need to update their orders (some brokers will do this for you, but it’s worth checking they have done it correctly).
Traders using DIY stop losses should compare the last closing 20 20
price 78 78 to their stop loss level. If long, then a closing price below your stop loss is a breach; if you’re short then it’s a price higher than your stop. If the closing price has breached the stop loss then you must close your position. You must close
it immediately, even if the price has recovered and your stop loss is no longer bei ng breached .
Table 20 shows the values I calculated on one particular day – 18
September 2018 – when all four of the initial trades were still open. For the short positions all prices are below the relevant stop loss level, and for the long positions the current price is above the stop. Hence all these positions can b e kept open.
Table 20: Updated stop losses for example instruments (18
September 2018)
High-water mark (A) based on most profitable price level between 18 June and 18 September. Stop loss gap (D) from table 18.
Current price on the 18 Sep tember 2019.
Rolling of dated positions
When trading the Starter System, you should expect to hold positions for a couple of months or so, though some trades will be stopped out quickly and others will last longer. Sooner or later you will find yourself holding a position in a dated product that is about to expire. At that point you will need to roll into the next dated product: closing your current date and opening the same position in the next date. The new contract date you select should be the one you’d choose if it was a brand-new trade, using the guidelines I outlined earlier in this chapter (se e page 137 ).
There is a cost to rolling, which is built into the calculations for holding costs in appendix B. However, it is worth trying to reduce that cost if you can. If you are trading futures, you would ideally use a spread order. This is a single order consisting of both a closing and an opening trade, which will be cheaper to execute than two separate orders. In some instruments the spread market isn’t very liquid, and you’ll need to do the roll as two individual orders. When CFD and spread betting, some brokers will charge half the normal spread, while others will make you pay the full cost. You should take this into account when choosing your broker.
In futures you will have to organise your own rolls. If you don’t roll futures trades with enough time left before the expiry date, 20 20
then the broker will sometimes automatically close them. 78 79 But they won’t open the new trade for you. Fortunately, most CFD and spread betting brokers will automatically roll trades if you request it in advance.
Here are the rolls I did for the example trades in this chapter, before the end of 2018:
I have added these trades to the trade log, in table 21. There is a new column ‘P&L’ which shows the profit or loss for the trade (losses are shown as negative values). This is calculated in
price points; I will convert these into real money later in the chapter.
Table 21: Trade log after rolls
‘Comm’: commissions. Excludes spread cost, since the price shown reflects the effect of paying the spread. No commissions are payable for spread bets, CFD, and spot FX. P&L is profit or loss in price points for closing trades only.
Trading diary
This section shows the trades that I subsequently did in each example instrument.
10 October 2018: first two stop losses are hit Table 22 shows the state of my stop loss calculations on the 10
October 2018. This was an interesting day in the markets – the S&P 500 dropped nearly 100 points, and there were sharp movements in markets across the globe. Both my corn and Euro Stoxx stop losses wer e triggered.
Table 22: Updated stop losses for example instruments (10 October 2018)
• Stop loss triggered. High-water mark (B) based on most profitable price level between 18 June and 10 October. Stop loss gap (D) from table 18. Current price on 10 O ctober 2019.
I immediately closed both my corn and Euro Stox x positions.
Next, I need to check to see if the opening rule has reversed its position, to see if a new trade is justified. Figure 15 shows that the opening rule for corn doesn’t want a long position, so for now I won’t be buying any corn. The trading plan forbids me from opening another short position in the same direction as the one I’ve just closed. In figure 16 the moving average crossover 20
for Euro Stoxx has been short for several weeks. 79¹ A new short trade is re quired here.
Figure 15: Corn doesn’t want a long position
Figure 16: Euro Stoxx opening rule has been short for weeks
Table 23: Trade log after closing corn and Euro Stoxx positions, and opening new Euro Stoxx trade
‘Comm’: commissions. Excludes spread cost, since the price shown reflects the effect of paying the spread. No commissions are payable for spread bets, CFD, and spot FX. P&L is profit or loss in price points for closing trades only.
To work out how large the new Euro Stoxx trade needs to be, I need to know the current capital available for that trade. And to work that out, I need to calculate the size
of the loss made on the initial trade. Table 23 shows an updated trade log for corn and Euro Stoxx. This also includes the new trade on Euro Stoxx.
I made losses on both Euro Stoxx trades: 26 points on one and 16
points on the next, for a total of 42 points. For the per contract CFD, where the position size was two contracts at €2 per contract, that w orks out at:
2 × €2 × 42 = €168 = $191
There were no commissions or holding costs. For the CFD betting per point, where the position size was €4.12 per point, the loss is:
€4.12 × 42 = €173 = $197
The capital for Euro Stoxx has fallen from $13,000 to $12,809
(per contract) or $12,803 (per point). All the relevant calculations for the new short trade in Euro Stoxx are shown below.
Table 24: Exposure sizing for October 10 Euro Stoxx trade Instrument risk (A) as of 10 October. Capital (B) includes original $13,000, less the loss on the first trade. Notional exposure calculated using formula 14 and risk ta rget of 12%.
Table 25: Initial stop loss for October 10 Euro Stoxx trade Instrument risk (A) and initial price (B) as of 10 October.
24 October 2018: hit a stop in S&P 500
The market takes another tumble on 24 October, and my stop level of $271.92 in S&P 500 is hit. I get taken out at $265 per share.
Looking at the opening rule in figure 17, I need to open a new short trade st raight away.
Figure 17: S&P 500 opening rule is already short
Next, we need to see how much capital is available. Table 26
shows the updated trade log. Again, this includes the new short trade, which I’ll do the calculations for in a moment.
Table 26: Trade log for S&P 500; old trade hits stop, new trade put on
‘Comm’: commissions. Excludes spread cost, since the price shown reflects the effect of paying the spread. P&L is profit or loss in price points for closing trades only.
I’ve lost $11 per share for a net loss of: 11 × 19 = $209
As my position ($5,244) was smaller than my account size ($7,100), I didn’t have to pay any financing costs; but I did have to cough up two lots of commission at $1 per trade, leaving me with a total loss of $211. Out of my original $7,100 capital, $6, 889 is left.
My calculations for the new short trade are shown below.
Table 27: Notional exposure for new S&P 500 trade
Instrument risk (A) as of 24th October. Capital (B) includes original $7,100 less loss on original trade. Notional exposure calculated using formula 14 and risk ta rget of 12%.
Table 28: Initial stop loss for new S&P 500 trade Instrument risk (A) and initial price (B) as of 24 October.
26 October 2018: A new trade in corn
I had to wait over two weeks before the opening rule has reversed its opinion on corn, as figure 18 shows. It is time to open a new position, again in the December 20 19 contract.
Figure 18: Finally time to go long corn First, we need to calculate the amount of capital available for the trade. Table 29 shows the updated trade l og for corn.
Table 29: Trade log for corn, including new trade
‘Comm’: commissions. Excludes spread cost, since the price shown reflects the effect of paying the spread. P&L is profit or loss in price points for closing trades only.
The previous corn trade made 16.25 – 4 =12.25 points. Since each contract price point is worth $50 (see table 14) that w orks out to:
12.25 × $50 × 2 = $1,225
After subtracting $8 in commissions, that leaves me with $1,217.
The position and stop loss calculations on this new trade are shown below.
Table 30: Exposure sizing for 26 October corn trade Instrument risk (A) as of 26 October. Capital (B) includes original $40,000 plus profits from first trade. Notional exposure calculated using formula 14 and risk ta rget of 12%.
Table 31: Initial stop loss for 26 October corn trade Instrument risk (A) and initial price (B) as of 26 October.
8 November 2018: trading activity summary I could not keep these example trades going forever, or this book would never have been finished. I decided to close all the remaining trades on 8 November. Below are the calculations for my profit and loss in the various notional tradi ng accounts.
Gold
Table 32: Final gold trade log
There are no commissions. Excludes spread cost, since the price shown reflects the effect of paying the spread. P&L is profit or loss in price points for closing trades only.
On gold, I made a total of 39.9+13.2 = 53.1 points. At £1.03 per point, with no commissions or holding costs, that works out to a 20
profit in the gold account of: 79²
£1.03 × 5 3.1 = £54.69
Corn
Table 33: Final corn future trade log
‘Comm’: commissions. Excludes spread cost, since the price shown reflects the effect of paying the spread. P&L is profit or loss in price points for closing trades only.
The first corn trade, closed on 10 October, made $1,217. The second trade lost a single price point. Since each contract price point is worth $50 (see table 14) that works out t o a loss of:
–1 × $5 0 × 1 = –$50
After subtracting $2 in commissions, that makes a loss of $52.
The total profit for corn is $1,217 – $52 = $1,165
Euro Stoxx 50
Table 34: Final trade log for Euro Stoxx CFD
There are no commissions. Excludes spread cost, since the price shown reflects the effect of paying the spread. P&L is profit or loss in price points for closing trades only.
For the per contract CFD trade the loss on the first trade, closed on 10 October, was $191. The next trade was up 26.5
points. With a position size of one contract at €2 per contract, that works out at a profit of:
1 × €2 × 26.5 = €53 = $60
I converted the euros into dollars, as this is a dollar trading account. There were no commissions or holding costs. The total return for Euro Stoxx is –$191 + $60 = –$131; a l oss of $131.
For the CFD betting per point, the loss on the first trade was $197. The next trade also made 26.5 points with a bet of €2 per point, making a profit of:
€2 × 26.5 = €53 = $60
The total loss is –$197 + $60 = $137
AUDUSD
Table 35: Final trade log for AUDUSD spot FX trade There are no commissions. Excludes spread cost, since the price shown reflects the effect of paying the spread. P&L is profit or loss in price points for closing trades only.
In the AUDUSD account my initial entry price was 0.744. I sold A$2,700 w hich bought:
2,700 × 0.744 = US$2,008.80
I closed the trade at 0.7254, at which level my original US$2,008.8 0 was worth:
2008.8 ÷ 0.7254 = A$2,769.23
This gives me a profit of:
A$2,769.23 – A$2,700 = A$69 .23 = £38.46
This is converted into pounds, as this is a GBP account. There are no commissions, but as an undated trade there were funding costs. I borrowed my AUD at an interest rate of 2%, and earned
2.25% in USD; hence I earned an extra 0.25% a year which over the life of the trade equates to A$2.64 = £1.47. The total profit for AUDUS D is £39.93.
S&P 500
Table 36: Final trade log for S&P 500 margin trading
‘Comm’: commissions. Excludes spread cost, since the price shown reflects the effect of paying the spread. P&L is profit or loss in price points for closing trades only.
For the S&P 500 account, I lost $211 on my initial trade. The second trade on 24 October was also closed for a further loss, this time of $1 5 per share:
–15 × 17 = –$255
Commissions cost me another $2. As I was short, I also had to pay a borrowing fee of 0.25% a year: $0.47. Sadly, my broker didn’t pay me any interest on the cash I realised from selling short.
The loss on the second trade w orks out to:
–$255 – $2 – $0.4 7 = –$257.47
That
makes the total loss on S&P 500 trading –$211 – $257.4 7 = –
$468.47
Table 37: Summary of trading profit and loss Table 37 summarises the profits, and losses, across the different trading accounts. If I count the two types of CFD as a single instrument, then the final score is three wins and two losses. Of course, this is far too short a period to draw any conclusions about the likely profitability of the Starter System. More importantly, the size of the losses and gains is roughly what I’d expect, given the risk target and time period.
In practice, someone actually using the Starter System would only have traded one of these instruments in a single account. I will discuss how to trade multiple instruments in part three.
Time saving tips
Performing the daily tasks to run the Starter System is less time consuming than working as a day trader and being chained to a desk. With practice, running the system only takes a few minutes each day, except for the occasions when you are actually trading.
But if you’re really short of time even that might seem too much of a commitment. Here are some tips for reducing your workl oad further.
Use the power of the internet
Many providers of free price data provide free tools for charting moving average crossovers. You can use these to see if an opening position should be established. This is quicker than doing it yourself, although it won’t be quite as accurate as using your own back-adjusted price series and a spreadsheet to calculate the crossovers.
Make your broker do some of the work
I am not a fan of leaving stop loss orders with your broker, but they are a time saving aid. If a broker will execute your stops, then you don’t need to check the price level every day.
Alternatively, you can subscribe to a brokers alert service that sends an email or SMS text message when a stop loss level has been reached. You can then close the position yourself using a mobile trading app.
Leave less urgent matters to the weekend Most part-time traders will have more spare time at the weekend.
As the Starter System trades relatively slowly, there are quite a few tasks you can safely postpone to Saturda y or Sunday: Checking and recording your ac count value.
Leveraged Trading: A professional approach to trading FX, stocks on margin, CFDs, spread bets and futures for all traders Page 14
